Inside Track – January 2020

  • It’s hard to reconcile what’s happening around the world with the overwhelming consensus that 2020 will continue to be a year of growth– entirely premised upon the conviction that central banks will keep interest rates very low (“Nobody should bet against central banks”). This silo thinking ignores the interconnectedness of economics with other macro-categories, let alone the impact of unexpected exogenous shocks such as a possible pandemic. Geopolitics, the environment (see below), technology and societal issues: all point to major discontinuities that in the months to come will impact economic growth. At the very best, expect it to be modest in 2020, and bear in mind that with sub-par global growth (in the 2.5 – 3.5% range) the global economy is more susceptible to a recession as it nears stall speed.
  • In the coming months, keep an eye on “zombie loans”(those made to fragile companies surviving on the life support of very low interest rates) and “leveraged loans” (those made to highly indebted companies often owned by private equity). A recent report from the Bank of England warns that, over the past five years, the global stock of leveraged loans has increased by 30% – reaching USD3tr+. The search for yields is encouraging highly questionable borrowers – this can’t go on forever.
  • If just one word has to distil the zeitgeist of this year’s Davos, it would be sustainability. As Larry Fink (the world’s biggest fund manager) and many others made it clear, awareness of climate change has crossed a tipping point and will entail a fundamental reshaping of finance. Some previous outliers may eventually become the norm; among them: (1) regulators forcing companies to disclose carbon emissions; (2) a proper global carbon tax priced at around USD75 a ton (instead of USD2 today); (3) the expansion of central banks’ traditional policy mandates with climate change mitigation becoming an explicit monetary policy objective (“Green QE” in the Eurozone and the UK).
  • There can be no more beating about the bush: in 2020, accelerating climate change will wreak havocin some countries, industries and asset classes. The evidence that global warming and associated extreme weather events are accelerating is everywhere – the climate crisis is intensifying much faster than many opinion-makers realise or care to admit.
  • The geo-economic consequences of the above will be far-reaching and multifaceted, ranging from greater food price volatility to the carbon tax becoming a geopolitical choke point. A general inference is that mature markets will tend to outperform while emerging ones will tend to underperform– simply because they have fewer financial resources to invest in risk-mitigating technology and processes. Also, European financial markets may end up benefitting since the continent has such a considerable head start in sustainability. As for the choke point: Europe may soon introduce “border adjustment mechanisms” (i.e. tariffs) on imports from other regions that penalise carbon emissions less than it does.
  • The spread of the coronavirus is accelerating. According to health experts, the reproduction number estimated at between 2 and 3 (on average, every infected person infects from 2 to 3 new people) makes an immediate containment of the outbreak elusive. At the time of writing (Jan. 30th), it is impossible to tell whether the outbreak will cause lasting and critical damage to China and the global economy. The gravity of this economic impact depends on the outbreak’s (1) duration, (2) severity and (3) spreadall of which are currently unknowns. The companies that are bound to suffer the most are those that thrive on concentrations of people (travel & tourism, retail) + global businesses most exposed to China.
  • The UK government’s decision to selectively approve Huawei technology in the country’s 5G telecoms network is the ultimate proof that if a country or a company has to choose between China and the US, it will choose China. Despite Donald Trump’s efforts to convince him to abandon Huawei, and despite his desire to please the US administration (the quid pro quo for securing a trade deal), Boris Johnson had to hedge his bets. This is a sign of things to come. Most global executives understand the monumental challenges that China faces but also reckon that it will eventually become the world’s number one power.
  • Globally, well-being public policies are gathering momentum. This is not a fad: for more and more policy-makers, the pursuit of well-being is just as important as economic growth. But why now? The climate emergency, widening geopolitical fault lines, social inequities and rising anger, tech and anxiety about jobs: all these are forcing policy-makers to recognise and act on well-being as an antidote to these prevailing ills. Interestingly but perhaps not unexpectedly, countries led by women(New Zealand, Norway, Finland, Scotland) lead the charge, but make no mistake: well-being and its underlying ‘wellness’ investment themes are one of tomorrow’s most enduring global mega trends.
  • A recent study conducted in France about the Gilets Jaunes makes the above even more relevant by shedding new light on the causes of the phenomenon, and many other ‘spontaneous’ social explosions or grievances around the world. Counter-intuitively, it’s not so much income and individual living standards that cause dissatisfaction, but rather the absence of community cohesion and the loss of meeting places. The study shows that a community that lost its last convenience store is 3x more likely to have experienced a Gilet Jaune event. If the greatest indicator of disaffection is the disappearance of local amenities, expect public policies to focus more on well-being (a sense of ‘belonging’) and quality of life rather than on hard-core revenue-and employment- maximising measures that often prove ineffective. This is the thrust of the report.
  • A big elephant in this year’s Davos room was the epidemic of mental illness in the boardroom. The CEO of a clinic specialised in mental health revealed that, over the past 7 years, she’s seen a 500% increase in CEOs referrals, observing that the very traits that lead to the top – risk-taking, resilience, tenacity – are also those that often induce depression, anxiety, and addiction. What to do? The clinic offers a certain weekly treatment, be it that there are also simpler (and less expensive) tools to address the issue. One consists of practicing mindfulness, reconnecting with nature and stepping back.
  • Download the full report: The Inside Track January 2020